Fraught Funding:

New Iraqi Budget, New Rules To Anger and Upset

Mustafa Habib

For the first time in over ten years, Iraq managed to pass a federal budget with MPs’ votes. In the process there have been last minute deals, Kurdish losers, angry militias and deeply rooted economic problems revealed.

After heated debates that dragged on for months, Iraq’s parliament passed the national budget for 2018. For the first time since 2003, the decision was made with a majority of votes in parliament in Baghdad, rather political deal making.

As the country’s Sunni Muslim and Shiite Muslim politicians brokered a deal though, Iraq’s Kurdish MPs were left hanging, after they exited the session in protest at the Kurdish share of the budget.

Laws on the federal budget say that a draft should be submitted to the Iraqi parliament no later than November 11 every year. However, this didn’t happen due to conflicts between the various political groupings in parliament and thanks to the country’s deepening financial crisis, started by a drop-in oil prices, then exacerbated by the security crisis caused by the extremist group known as the Islamic State.

The Iraqi Kurdish prime minister called it a collapse of the principles of partnership in power, upon which the modern Iraqi state was built.

Around 90 percent of funds coming into the Iraqi budget are dependent on the country’s oil revenues. If oil stays at US$46 a barrel and exports remain at 3.8 million barrels a day, then this would all funnel into US$88 billion budget. That still leaves a shortfall of US$10 billion, according to the recently passed budget.

As recently as last week, it had not looked at all certain that the 2018 budget would pass. A number of disparate groups were opposed to the draft budget, all for their own reasons. This included Sunnis, Shiites from southern oil-producing provinces and the country’s Kurdish ethnicity.

For months previously, the Sunni politicians had been calling for more money for reconstruction in Sunni-majority provinces where the extremist Islamic State, or IS, group had held sway. The salaries of state employees in these areas had been halted since late 2014 for fear that the cash would end up in the IS group’s hands. Still, in many of the Sunni-majority provinces, it’s been months since displaced locals started returning home – but the salaries still have not started to be paid again. Sunni Muslim MPS were pressuring the government to restart these.

“We were able to convince the government to agree to pay out those stalled salaries and to offer locals loans, so they can rebuild their homes,” Ahmad al-Jibouri, an MP for Mosul, told NIQASH. “We were also able to convince the government to reappoint those individuals who were dismissed from the army and police and to give back state service jobs to locals in those areas too.”

Article 43 of the Iraqi budget now states that “an additional US$344 million is to be allocated to provinces and areas that fell under the control of the IS group, in order to help stabilize the area and for the reconstruction of infrastructure.”

The budget then details which province gets what: Ninawa, of which Mosul is the capital, will get US$152 million, Salahaddin and Anbar will each get US$84 million and Kirkuk in northern Iraq and Diyala will both get US$17 million.

This change saw the Sunni Muslim politicians willing to agree to the budget.

Meanwhile the Shiite Muslim MPs from southern oil-producing provinces came to agree to the budget for different reasons.

Laws from 2013, about the powers of the provincial authorities, allocate part of the revenue from the oil and gas produced there to the province itself. A province should be getting 5 percent of the money from each barrel of crude oil, 5 percent from each barrel refined in the province and 5 percent from natural gas revenues. However, the Iraqi government has not dispensed money in this way for years due to its own need for the cash.

This has had an impact. For example, the southern province of Basra should be one of the country’s wealthiest, going by how much oil and gas is produced here. However, the province also has one of the highest rates of locals living in poverty.

Shiite MPs from these provinces were dissatisfied by that distribution and wanted to force a change before they would agree to vote for the 2018 budget. The government then guaranteed in Article 2 of Chapter 2 of the budget that the provinces that produce the country’s oil would get one of those 5 percents.

For example, Basra extracts oil, refines it and also produces natural gas. According to the original rules, the province should be getting 5 percent from each form of energy. If the province extracts one barrel of oil and then refines it, it should be getting 5 percent plus 5 percent. However the new rules say the province will only get one of those payments.

At least that is better than nothing, says Ammar Tumeh, a Shiite Muslim MP.

“And the budget will also give the oil-producing provinces 20 percent of any budget surplus, should the price of oil go up, beyond the US$46 per barrel,” Tumeh adds.

Of the various interest groups competing to turn the budget to their advantage, the biggest losers were the country’s Kurds. Kurdish politicians withdrew from the final session to vote on the budget in protest over the percentage their semi-autonomous, northern region was supposed to get. The Kurds run their own semi-independent region in northern Iraq; it has its own military, parliament and laws. In the past the Iraqi Kurdish region had been supposed to receive 17 percent of the federal budget, based on how much oil revenue the region contributed to the national income and on the region’s population.

The topic has been a long-running cause of conflict between Baghdad and Iraqi Kurdistan and things recently worsened, after the ill-fated referendum on independence in the northern region in September last year. And the proposed budget didn’t make things any better as the first version of the document saw the Kurdish share of the federal budget drop to around 12 percent.

The new version of the budget does not apparently specify a percentage for the Kurds but analysts suggest that it may now be sitting around 14 percent. None of this matters, of course, if the Iraqi government doesn’t start paying the money to the Kurdish authorities and paying the salaries of Kurdish civil servants.

The fact that the federal budget was passed in parliament even after the Iraqi Kurdish MPs walked out was a source of consternation for those running the Kurdish region. The Iraqi Kurdish prime minister, Nechirvan Barzani, called the budget decision a collapse of the principles of partnership in power, upon which the modern Iraqi state was built.

Now that the budget has passed, it is also far from trouble free.

Another sticking point arose almost immediately. The new budget allocates US$2.5 billion worth of defence spending like this: US$600 million for the ministry of defence, US$146 million to the ministry of interior, US$80 million to the counter-terrorism forces and US$80 million for the formerly-volunteer, mostly-Shiite Muslim militias. The rest – over US$1 billion - will go towards armaments and weaponry.

But just hours after it was approved, some Shiite Muslim politicians were already complaining. The fighters in the militias, which started as a volunteer force assembled to combat the IS group and which have evolved into an official, albeit separate, part of the Iraqi defence forces, were only listed as contractors. Their salaries are paid by the government but the budget says they are not permanent government employees, unlike soldiers in the Iraqi army. Additionally the militia fighters were getting lower salaries than those the ministry of defence was paying out.

Keeping the heroes of the militias on a different pay level and defining them as contractors was “the ultimate betrayal,” said Qais al-Khazali, who heads one of the more extreme militias, the League of the Righteous. Despite their controversial nature, members of the militias are seen by many as heroes who stepped up to protect the homeland when the official army collapsed in the face of attacks by the IS group.

The new budget also presents further problems for the future. It outlines a number of austerity measures and new taxes of the kind that have not been seen in Iraq for decades.

For one thing, the government has decided to suspend new appointments in the civil service. This could have a dramatic impact because a lot of Iraqis are employed by the government – it is the only way that many locals will ever be employed as the private sector remains very small in comparison to the government sector. A lot of young Iraqis see a government job as their only option to get work. But the number of new openings has been falling steadily since 2013. That year there were 100,000. In 2014, there were only 37,000, in 2015, 30,000 and in 2016, 32, 000. Last year there were only a few thousand and this year there will be none at all.

It’s a decision that threatens to increase the national rate of unemployment dramatically. In 2012, the rate was estimated to be around 12 percent. By 2017, it had risen to 30 percent, thanks mainly to the chaos caused by the security crisis and the displacement of millions of Iraqis from their homes. The rate is almost bound to increase further by the end of 2018, with this new directive.

There are also new taxes for the newly unemployable to think about paying. The Iraqi government wants to impose a sales tax on the costs of using mobile phones and on Internet fees. A special tax will be added whenever an Iraqi buys mobile phone units. So for instance, if somebody buys US§10 worth of mobile phone credit, they will need to pay US§12 in the future.

The tax of US$20 added to every ticket in Iraqi airports will also continue to be charged.

Another item in the Iraqi budget that does not bode well for the future is the amount of foreign debt that the government is continuing to take on.